Cryptocurrency has revolutionized the financial landscape, emerging as a high-risk, high-reward investment option. As its popularity grows, the question of incorporating cryptocurrency into employer-sponsored retirement plans has sparked debate among regulators, employers and investors alike.
Prior Guidance and Current Change
Over the past few years, federal guidance on cryptocurrency in retirement plans has fluctuated. In 2022, the Department of Labor (DOL) under the Biden administration issued guidance encouraging plan fiduciaries to “exercise extreme care” in considering whether to include cryptocurrency in employer-sponsored retirement plans, citing concerns over volatility and fiduciary risks. However, the Trump administration rescinded this guidance in May, taking a more neutral stance on cryptocurrency in retirement plans and potentially opening the door for broader exploration of crypto investments. These shifts reflect the evolving regulatory approach to cryptocurrency as an investment class.
Inherent Concerns with Cryptocurrency Investments
Cryptocurrency is not without its challenges, especially in retirement portfolios.
- Volatility: Cryptocurrencies are notoriously volatile, with recent boom and bust cycles highlighting the unpredictability of their value. For example, Bitcoin’s meteoric rise to nearly $70,000 in 2021 was followed by a dramatic crash, underscoring the risks for long-term investors.
- Regulatory Uncertainty: The SEC has yet to establish clear regulations for cryptocurrency. It has created a Crypto Task Force that is working clarify how federal securities laws apply to cryptocurrency but until such guidelines are finalized, investors face significant uncertainty.
- Fraud and Cybersecurity Risks: Cryptocurrency’s decentralized nature makes it susceptible to fraud and cyberattacks. High-profile hacks and Ponzi schemes have underscored the importance of investor vigilance.
- Liquidity Challenges: Unlike traditional assets, cryptocurrency may face liquidity issues, potentially complicating its inclusion in retirement portfolios.
Fiduciary Responsibility Under ERISA
Plan fiduciaries that choose to offer cryptocurrency investments in their retirement plans must still adhere to the ERISA fiduciary duties of loyalty and prudence in selecting those investment options.
- Target Date Funds (TDFs): Employers must assess the underlying investments within TDFs to ensure alignment with ERISA standards. For instance, if a TDF includes cryptocurrency, employers should ask questions about the fund’s risk management, valuation methodologies and safeguards against fraud.
- Brokerage Windows: Employers should carefully evaluate whether offering cryptocurrency through brokerage windows aligns with their fiduciary responsibilities and the plan’s objectives.
Prohibited Transaction Issues
To the extent that cryptocurrency companies want to offer their own cryptocurrency as an investment option in a 401(k) plan, they must be mindful of ERISA’s prohibited transaction rules. Offering a company’s own cryptocurrency as an investment option could raise concerns about self-dealing and conflicts of interest, requiring careful legal analysis.
Conclusion
Cryptocurrency presents intriguing opportunities and significant risks for employer-sponsored retirement plans. Plan fiduciaries must navigate regulatory uncertainty, manage fiduciary responsibilities and address prohibited transaction concerns. As the regulatory landscape evolves, this will continue to be an active topic in retirement planning discussions.
The material contained in this communication is informational, general in nature and does not constitute legal advice. The material contained in this communication should not be relied upon or used without consulting a lawyer to consider your specific circumstances. This communication was published on the date specified and may not include any changes in the topics, laws, rules or regulations covered. Receipt of this communication does not establish an attorney-client relationship. In some jurisdictions, this communication may be considered attorney advertising.
